http://en.wikipedia.org/wiki/Watertown,_Wisconsin
Read down, a railroad bond fund default by a city.
They did their own CDO, packaged up a bond that was for sure going to default, and then sold that crap off to some outsiders (well makes a good story anyway). Then the city defaulted on building the railroad, railroad went bankrupt, and then the city completely dissolved the government so that there was no person who could be served with a suit.
The bondholders were mad and chased them all the way to the Supreme court, who decided, you guys don't get diddly.
The year ---
1855, and influenced by the Panic of 1857
